The Players: Private Investors, Institutions, Market Makers

Every time a share changes hands on the stock market, someone is buying and someone is selling. But who are these people? Walk behind the curtain of the London Stock Exchange and you will find a surprisingly varied cast of characters, each with different motivations, different resources and very different relationships with risk. Knowing who the players are is one of the most useful things you can do before putting your own money to work.

The most obvious participant is the private investor. That is you, or anyone else who opens a share dealing account or ISA and decides to put some of their own money into shares. Private investors are sometimes called retail investors, and the term is not meant as an insult, even if it occasionally sounds like one. It simply distinguishes individuals from the larger institutions who also trade. As a group, private investors in the UK number in the millions, but individually we tend to be small. A typical retail investor might put a few hundred or a few thousand pounds into a company, and we buy and sell relatively infrequently. Our advantage is flexibility: we can move quickly, hold for as long as we like, and we do not have a board of trustees breathing down our necks if we hold an unfashionable stock for three years.

The counterweight to the private investor is the institutional investor. This category covers an enormous range of organisations, but the biggest and most important in the UK are pension funds, insurance companies, unit trusts, investment trusts and hedge funds. These institutions manage money on behalf of others: your pension contributions, your insurance premiums, or the capital of wealthy clients. Because they are pooling money from many sources, they operate at a completely different scale. A large pension fund might hold tens of billions of pounds in assets. When a fund of that size wants to buy or sell shares, it cannot simply place an order like you or I would, because even placing the order would move the market. Institutions spend enormous effort managing exactly how and when they trade, often breaking large orders into smaller pieces spread over several days.

Pension funds and insurance companies tend to be the most conservative of the institutions. They have long-term liabilities, meaning they owe money to pensioners or policyholders at some point in the future, so their investment decisions are shaped by the need to match those obligations. They are not trying to get rich quickly. Unit trusts and investment trusts pool money from many private investors and invest it according to a stated strategy. Your money might be sitting inside a unit trust right now if you have ever bought a fund through a platform like Hargreaves Lansdown or Vanguard.

Hedge funds are a different animal altogether. They are private investment partnerships, typically open only to wealthy or institutional investors, and they can use strategies that ordinary funds cannot: short selling (betting that a share price will fall), leverage (borrowing to amplify returns), and complex derivatives. They are not inherently villains, despite the reputation they sometimes attract in the press, but they do move fast and can exert significant pressure on share prices, particularly in smaller companies.

Then there are the market makers. This is the group that most people have never heard of but who are crucial to everything working smoothly. A market maker is a firm, typically a large bank or specialist trading house, that commits to quoting both a buying price and a selling price for a share at all times during market hours. The price they will sell to you is called the offer price, and the price at which they will buy from you is the bid price. The difference between the two is called the spread, and it is how market makers earn their keep.

Market makers exist because buyers and sellers do not always show up at the same moment. If you want to sell 500 shares in a mid-cap company at 11 o’clock on a Tuesday morning, there may not be another private investor sitting at their screen at exactly that moment, ready to buy. The market maker steps in as the immediate counterparty, taking your shares onto their own book and then looking to sell them on later. In exchange for providing this constant liquidity, they keep the spread as their profit margin. The spread is one reason why you always buy at a slightly higher price than you sell: you are paying for the convenience of being able to trade whenever you want.

Sitting between all of these participants are the stockbrokers. A stockbroker is simply an intermediary with access to the market. When you place an order through your online platform, your broker routes that order to the market. Today, most private investors use execution-only brokers, which means they simply carry out your instructions without offering advice. The distinction between brokers, advisers and discretionary managers is worth understanding and is covered in its own post in this series.

Analysts deserve a mention too. These are professionals, usually employed by investment banks or independent research firms, who study companies in depth and publish reports with earnings forecasts, valuations and recommendations. Their research influences where institutions put their money, which in turn moves share prices. A positive note from a well-regarded analyst at a major bank can push a share up measurably. Private investors rarely get access to institutional research directly, but analyst estimates appear in many of the data feeds available through modern trading platforms.

What does all of this mean for you as a private investor? A few things. The spread means every trade has a small cost built in before you have even considered dealing fees. Institutional buying or selling can move a share price significantly, particularly in smaller companies, so watching volume alongside price tells you more than price alone. And when a hedge fund takes a short position in a company, it will often become public information, which can be worth tracking.

The market is not a level playing field in terms of resources, information, or scale. But private investors have always found ways to navigate it profitably, often by focusing on parts of the market where the big institutions simply cannot operate, or by holding with a patience that short-term traders cannot match.

TL;DR — the short version

• Private investors are individuals trading their own money; flexibility and patience are their main advantages over larger players.
• Institutional investors such as pension funds, unit trusts and insurance companies manage money at enormous scale and dominate market volumes.
• Hedge funds can use strategies ordinary investors cannot, including short selling and borrowing to amplify bets.
• Market makers quote both a buy and a sell price at all times, providing the liquidity that makes it possible to trade whenever you want.
• The bid-offer spread is how market makers earn their income, and it is a real, if small, cost on every trade you make.
• Analysts employed by banks and research firms influence where institutional money flows, and their estimates are visible in most modern trading platforms.

Disclaimer: The value of investments can go down as well as up, and you may get back less than you invest. This article is for informational and educational purposes only and does not constitute financial advice. Always do your own research and consider seeking independent advice before making any investment decision.

This article is for informational purposes only and does not constitute financial advice. Investment values can go down as well as up. Always do your own research before making any financial decisions.